After you have worked through this section of the learning unit, you should be able to:
- present fixed cost, variable cost and total cost aid of diagrams
- describe the relationship between total product and marginal product
We can now use the data for the total fixed cost (TFC), total variable cost (TVC) and total cost (TC) of Best Barber to graphically construct the total fixed cost curve, the total variable cost curve and the total cost curve.
Note the following about the cost curves:
The shape of the total cost curve is the same as the shape of the total variable cost curve. This is because the total fixed cost curve does not vary as the level of output varies.
The vertical distance between the total cost curve and the total variable cost curve is equal to the fixed costs. The total cost if the level of output at zero is R320, which is equal to the fixed cost.
The difference between total cost and total variable cost is the total fixed cost.
Once production starts, total costs and variable costs rise. While variable costs may initially increase at a decreasing rate at some point, they begin increasing at an increasing rate. This is caused by diminishing marginal returns.
Do the following activity to see if you understand the different cost curves:
The diagram below indicates the fixed cost, variable cost and total cost curve for Blaker Maker:
These cost curves are based on the following data:
|Quantity of ornaments Q||Total fixed costs
|Total variable cost
|0||20 000||0||20 000|
|1 000||20 000||30 000||50 000|
|2 000||20 000||50 000||70 000|
|3 000||20 000||65 000||85 000|
|4 000||20 000||85 000||105 000|
|5 000||20 000||110 00||130 000|
|6 000||20 000||150 00||170 000|
|7 000||20 000||210 000||230 000|
a. Identify the different curves:
Curve 1 ________
Curve 2 ________
Curve 3 ________
b. The vertical distance between the total cost curve and the variable cost curve is equal to ________.
c. The shape of the total cost curve is determined by the shape of the ________.
- total fixed cost curve
- total variable cost curve
d. Choose the correct terms in brackets.
According to the total variable cost curve, up to an output level of 3 000, total variable cost increases for every 1 000 units by (lower amounts; higher amounts), while from 3 000 it increases for every 1 000 units by (lower amounts; higher amounts).